Reflections on the economy Featured
The Bank of Zambia has failed to meet the required K2.6 billion per bond auction as only K854 million was raised during the latest auction results published on February 17 this year.
The subscription rates are an economic barometer of the economy, as an over subscription is generally seen as mark of economic confidence by investors, while an under subscription is seen as a score for low investor confidence.
The Bank of Zambia, trying to raise funds on behalf of the government by issuing government bonds, only managed to raise K854 million out of the targeted K2.6 billion, an under subscription or low uptake of 32 per cent. Investors are on the fence due to uncertainty with regards to national debt restructuring.
We will not be surprised if the bankers of economic evils eventually start printing money.
These are the effects of removing liquidity from the markets. We strongly suspect financial institution participation in government securities has dwindled resulting in low subscriptions, meaning the funding of government operations will be negatively impacted.
And we don’t think this is caused by debt restructuring uncertainty as is being suggested. This should be seen as a direct consequence of low liquidity levels primarily, and the possible pull out of non-resident investors upon maturity of their securities. The rise in interest rates in the United States and Europe is also incentivising non-resident investors to pull out of emerging markets bond investments and redirecting back to the United States and Europe which carry less country risk than emerging markets, in other words in more secure economic environments.
The maturity risk is now materialising whereby offshore investors in government securities are now cashing out on maturity of their investments instead of rolling over. So we will now end in a net payout position for government securities with the following consequences:
(i) Depletion of international reserves as investors externalise their investment. The question is: what are the international reserves cover for offshore investment holding in government securities?
(ii) Pressure on the Kwacha with a medium-term outlook of continued depreciation, which will result in higher, imported inflation impact.
The question is: how will the increase in statutory reserve ratio, which has reduced liquidity in the market, mitigate this? Ultimately it appears this policy measure is impotent – for lack of a better word. Worse still, it slows down economic growth.
(iii) Under subscription in government securities, which is one of the main sources of funds for government operations, will significantly affect funding of government operations, including civil servants’ payroll.
Based on February 17 under subscription of only K845 million out of a total offer of K2.6 billion means the government has to look elsewhere to raise funds for the shortfall. The question is: given the already underperforming economy, what alternatives does government have? External loans. But who will be ready to give us loans? The commercial loans window is closed given the debt default and limited bilateral funding.
Where to as a country?
• Reverse the generous tax holidays given to the mining sector.
• Engage China on a bilateral basis to give us a three-year moratorium on its debt while we grapple with the never-ending IMF-G20 common framework.
• Introduce austerity measures, including government-wide international travels at all levels, including for the Head of State.
Lastly, reverse wrong monetary policy decisions taken by the Bank of Zambia to increase the statutory reserve ratio. The under subscription in government securities, stated above, is partially due to reduced participation of the banks in subscribing to government securities. It is also clear that this policy direction will not impact the exchange rate depreciation as it is now evident that the forex demand side is significantly driven by non-resident/offshore investors cashing out and not rolling over their government securities. This is a highly misdirected policy decision. As if this is not enough, the MPC was further increased by 0.25 per cent, making it unbearable for those with commercial loans and those intending to borrow. We hope your new 4×4, which was funded using vehicle and asset finance, will not be taken away if you default due to the high cost of credit.
Austerity measures should also include Mr Hakainde Hichilema moving to Nkwazi House to defray his daily transportation costs to and from his not so Community House and route lining costs. The country is bleeding and we can’t keep up with the same excuse of Nkwazi House being uninhabitable when ordinary citizens are going without food.
A leader should lead by example from the front and demonstrate that he, too, is sacrificing.